B ASIC F INANCIAL S TATEMENTS AND O THER F INANCIAL I NFORMATION

Transcription

1 B ASIC F INANCIAL S TATEMENTS AND O THER F INANCIAL I NFORMATION Kalkaska County Hospital Authority & Subsidiary Years Ended June 30, 2010 and 2009 With Reports of Independent Auditors Ernst & Young LLP

2 Basic Financial Statements and Other Financial Information Years Ended June 30, 2010 and 2009 Contents Report of Independent Auditors...1 Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of the Basic Financial Statements Performed in Accordance With Government Auditing Standards...3 Basic Financial Statements Basic Statements of Net Assets...5 Basic Statements of Revenues, Expenses, and Changes in Net Assets...6 Basic Statements of Cash Flows...7 Notes to Basic Financial Statements...8 Other Financial Information Details of Combining Statement of Revenues, Expenses, and Changes in Net Assets

3 Ernst & Young LLP Suite Monroe Avenue NW Grand Rapids, MI Tel: Fax: Report of Independent Auditors The Board of Directors Kalkaska County Hospital Authority & Subsidiary We have audited the accompanying basic statements of net assets of Kalkaska County Hospital Authority & Subsidiary (the Hospital) as of June 30, 2010 and 2009, and the related basic statements of revenues, expenses, and changes in net assets and cash flows for the years then ended. These basic financial statements are the responsibility of the Hospital s management. Our responsibility is to express an opinion on these basic financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the basic financial statements are free of material misstatement. We were not engaged to perform an audit of the Hospital s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Hospital s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the basic financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the basic financial statements referred to above present fairly, in all material respects, the financial position of Kalkaska County Hospital Authority & Subsidiary as of June 30, 2010 and 2009, and the changes in its net assets and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. In accordance with Government Auditing Standards, we have also issued our report dated September 16, 2010, on our consideration of Kalkaska County Hospital Authority & Subsidiary s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audits A member firm of Ernst & Young Global Limited

4 Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The other financial information appearing on page 22 is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. The accompanying basic financial statements do not present management s discussion and analysis of the Hospital s financial position and operating results. The Governmental Accounting Standards Board has determined that this analysis is necessary to supplement, although not required to be part of, the basic financial statements. September 16, 2010 ey A member firm of Ernst & Young Global Limited

5 Ernst & Young LLP Suite Monroe Avenue NW Grand Rapids, MI Tel: Fax: Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of the Basic Financial Statements Performed in Accordance With Government Auditing Standards The Board of Directors Kalkaska County Hospital Authority & Subsidiary We have audited the basic financial statements of Kalkaska County Hospital Authority & Subsidiary (the Hospital) as of and for the years ended June 30, 2010 and 2009, and have issued our report thereon dated September 16, We conducted our audits in accordance with U.S. generally accepted auditing standards and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing our audits, we considered the Hospital s internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the basic financial statements but not for the purpose of expressing an opinion on the effectiveness of the Hospital s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Hospital s internal control over financial reporting. A deficiency in internal control exists when the design of operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, detect, and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Hospital s basic financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a A member firm of Ernst & Young Global Limited

6 direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audits and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. This report is intended solely for the information and use of the Board of Directors, management, federal awarding agencies, and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. September 16, 2010 EY A member firm of Ernst & Young Global Limited

7 Basic Statements of Net Assets Assets Current assets: Cash and cash equivalents 5,735,614 June $ $ 4,840,415 Accounts receivable 3,974,630 3,143,983 Third-party settlements 132, ,006 Prepaid expenses 514, ,842 Total current assets 10,357,272 9,342,246 Assets internally designated for capital acquisitions 178, ,346 Capital assets (net of accumulated depreciation) 29,994,173 29,095,252 Land 1,131,719 1,131,719 Other assets 333, ,543 Total assets 41,994,685 40,009,106 Liabilities Current liabilities: Current maturities long-term debt 1,015,533 1,045,140 Trade accounts payable 1,372,448 1,575,347 Accrued liabilities and other 2,001,588 2,191,942 Total current liabilities 4,389,569 4,812,429 Long-term debt, less current maturities 11,310,259 10,409,226 Total liabilities 15,699,828 15,221,655 Net assets Invested in capital assets, net of related debt 18,800,100 18,772,605 Unrestricted 7,494,757 6,014,846 Total net assets $ 26,294,857 $ 24,787,451 See accompanying notes

8 Basic Statements of Revenues, Expenses, and Changes in Net Assets Year Ended June Operating revenues Net patient service revenue $ 25,316,554 $ 23,770,787 Other 965,141 1,015,340 Total operating revenues 26,281,695 24,786,127 Operating expenses Salaries and wages 9,885,688 9,442,305 Employee benefits and payroll taxes 3,497,207 3,006,351 Medical supplies and drugs 2,936,758 2,910,355 Professional services and consultant fees 793, ,744 Purchased services 3,404,393 3,302,680 Insurance 288, ,588 Occupancy 893, ,584 Equipment, software, and maintenance 458, ,921 Depreciation 2,065,233 1,641,864 Other 1,186,805 1,144,577 Total operating expenses 25,409,618 23,497,969 Operating income 872,077 1,288,158 Nonoperating revenues (expenses) Investment income 6,078 55,390 Interest on debt related to capital assets (615,331) (213,892) Tax levy revenue 1,244,582 1,197,310 Total nonoperating revenues, net 635,329 1,038,808 Increase in net assets 1,507,406 2,326,966 Net assets at beginning of year 24,787,451 22,460,485 Net assets at end of year $ 26,294,857 $ 24,787,451 See accompanying notes

9 Basic Statements of Cash Flows Year Ended June Cash flow from operating activities Received from patients and third-party payors $ 25,336,377 $ 22,967,410 Payments to employees (13,340,489) (12,347,041) Payments to suppliers for services and goods (10,513,435) (11,838,474) Other receipts from operations 972,345 1,022,141 Net cash provided by (used in) operating activities 2,454,798 (195,964) Cash flow from capital and related financing activities Acquisition and construction of capital assets (3,044,170) (9,739,199) Transfer to other assets from capital assets 80,016 Proceeds from county bond tax levy 1,237,378 1,190,509 Interest paid on long-term debt (615,331) (487,857) Issuance of long-term debt 2,807,328 4,192,672 Principal payments on bonds and notes payable (1,935,902) (740,345) Increase in deferred bond issue costs (121,400) Net cash used in capital and related financing activities (1,470,681) (5,705,620) Cash flow from investing activities Investment income 6,078 55,390 Net proceeds from short-term investments 502,030 Transfer to other assets from capital assets (80,016) Net (purchase of) proceeds from internally designated for capital acquisitions (14,980) 4,677,126 Net cash (used in) provided by investing activities (88,918) 5,234,546 Net increase (decrease) in cash and cash equivalents 895,199 (667,038) Cash and cash equivalents at beginning of year 4,840,415 5,507,453 Cash and cash equivalents at end of year $ 5,735,614 $ 4,840,415 Reconciliation of operating income to net cash flows from operating activities Operating income $ 872,077 $ 1,288,158 Adjustments to reconcile operating income to net cash provided by (used in) operating activities: Depreciation 2,065,233 1,641,864 Provision for uncollectible accounts 1,388,359 1,098,493 Amortization 23,364 19,936 Operating tax levy 7,204 6,801 (Increase) decrease in assets: Patient accounts receivable (2,219,006) (1,488,240) Third-party settlements 850,470 (413,630) Other current assets (139,650) 14,109 Increase (decrease) in liabilities: Trade accounts payable (202,899) (2,166,960) Other accrued liabilities (190,354) (196,495) Net cash provided by (used in) operating activities $ 2,454,798 $ (195,964) See accompanying notes

10 Notes to Basic Financial Statements June 30, Nature of Business and Significant Accounting Policies Reporting Entity and Corporate Structure Kalkaska County Hospital Authority & Subsidiary (the Hospital), d/b/a Kalkaska Memorial Health Center, is located in Kalkaska, Michigan, and provides inpatient, outpatient, long-term care services, and senior housing primarily to the citizens of Kalkaska County, Michigan. The Hospital is organized as a governmental unit in accordance with the Joint Hospital Authority Act 47 of the Michigan Public Acts of Accordingly, the Hospital is not subject to income taxes, and no income tax provision has been recorded in the basic financial statements. The Hospital s basic financial statements are prepared on the accrual basis of accounting. On December 6, 2007, Kalkaska County Hospital Authority became the sole member of Level Acres Non-Profit Housing Corporation, a Michigan nonprofit corporation, and exempt under Section 501(c)(3) by the Internal Revenue Service. The financial statements include the financial activity for Level Acres Non-Profit Housing Corporation. Also, during 2008, the Hospital began providing dialysis services, which is approved by Medicare as a distinct unit. Basis of Presentation The basic financial statements have been prepared in accordance with generally accepted accounting principles as prescribed by Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, issued in June The Hospital follows the business-type activities reporting requirements of GASB Statement No. 34, which provide a comprehensive look at the Hospital s financial activities. No component units are required to be reported in the Hospital s basic financial statements. The Hospital has elected not to apply provisions of relevant Financial Accounting Standard Board (FASB) statements issued after November 30, Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates

11 Notes to Basic Financial Statements (continued) 1. Nature of Business and Significant Accounting Policies (continued) Cash and Cash Equivalents Cash and cash equivalents include cash and investments in highly liquid investments purchased with an original maturity of three months or less. Certain cash equivalents of $321,066 at June 30, 2010, and $68,364 at June 30, 2009, are domestic certificates of deposit that have original maturity dates greater than three months. These are classified as short term due to their ability to be redeemed at any time for operating purposes. Internally Designated for Capital Acquisitions Internally designated for capital acquisitions include assets designated by the Hospital s Board of Directors to provide for future replacement of facilities and equipment. Capital Assets Capital assets and equipment are stated at cost or, if donated, at fair value at the date of donation. Depreciation on capital assets, excluding construction-in-progress, is computed using straightline methods over the estimated useful lives of the assets. The general range of estimated useful lives of the assets is 10 to 40 years for buildings and 3 to 20 years for equipment. Outlays for construction-in-progress are capitalized as incurred. At June 30, 2010, the Hospital had no building commitments. At June 30, 2009, the Hospital had building commitments totaling $1.6 million. Asset Impairment The Hospital considers whether indicators of impairment are present and performs the necessary tests to determine if the carrying value of an asset is appropriate. Impairment write-downs, except for those related to investments, are recognized in operating income at the time the impairment is identified

12 Notes to Basic Financial Statements (continued) 1. Nature of Business and Significant Accounting Policies (continued) Other Assets Other assets represent deferred charges that include legal, consulting, and financial costs associated with debt financing and are being amortized over the term of the debt agreement. Other assets also include property held by the hospital for nonoperational use. Classification of Net Assets Net assets of the Hospital are classified into two components. Net assets invested in capital assets, net of related debt, consist of capital assets net of accumulated depreciation reduced by the current balances of any outstanding borrowings used to finance the purchase or construction of those assets. Unrestricted net assets are remaining net assets that do not meet the definition of invested in capital assets, net of related debt. Net Patient Service Revenue, Net of Bad Debt Net patient service revenue, net of bad debts, is reported at the estimated net realizable amounts from patients, third-party payors, and others for services provided and includes estimated retroactive revenue adjustments due to future audits and reviews as well as a provision for uncollectible accounts. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known. Net patient service revenue decreased $94,666 and increased $30,000 for the years ended June 30, 2010 and 2009, respectively, related to changes in estimated third-party settlements for prior years. The Hospital has agreements with third-party payors that provide for payments to the Hospital at amounts different from its established rates. For 2010, approximately 88% (89% for 2009) of the Hospital s net patient service revenue is received from the Medicare, Medicaid, and Blue Cross Blue Shield of Michigan programs. The Hospital is designated as a critical access hospital under Medicare regulations. Under this designation, the Hospital receives 101% of reasonable, cost-based reimbursement for inpatient and outpatient services provided to Medicare beneficiaries

13 Notes to Basic Financial Statements (continued) 1. Nature of Business and Significant Accounting Policies (continued) Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action, including fines, penalties, and exclusion from the Medicare and Medicaid programs. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. Noncompliance with Medicare and Medicaid laws and regulations could make the Hospital subject to significant regulatory action, including significant fines and penalties, as well as exclusion from the Medicare and Medicaid programs. The Hospital records a provision for uncollectible accounts as a deduction from net patient service revenue during the period in which collection is considered doubtful. The provision for uncollectible accounts totaled $1,388,359 and $1,098,494 for the years ended June 30, 2010 and 2009, respectively. Net patient service revenue is presented net of Medicare, Medicaid, managed care, and other third-party contractual expense of $10,518,065 and $7,811,476 for the years ended June 30, 2010 and 2009, respectively. Functional Classification of Expenses The Hospital provides general healthcare services to residents within communities served, including inpatient, outpatient, and long-term care services. The Hospital does not report expense information by functional classification because its resources and activities are primarily related to providing healthcare services. Further, since the Hospital receives substantially all of its resources from providing healthcare services in a manner similar to a business enterprise, other indicators contained in these basic financial statements are considered important in evaluating how well management has discharged its stewardship responsibilities. Operating Revenue and Expenses The Hospital s basic statement of revenues, expenses, and changes in net assets distinguishes between operating and nonoperating revenue and expenses. Operating revenue results from exchange transactions associated with providing healthcare services, the Hospital s principal activity. Non-exchange revenue, including taxes, grants, and contributions received for purposes other than capital asset acquisition, are reported as nonoperating revenue. Operating expenses are all expenses incurred to provide healthcare and housing services, other than financing costs

14 Notes to Basic Financial Statements (continued) 1. Nature of Business and Significant Accounting Policies (continued) Charity Care The Hospital provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than established rates. Because the Hospital does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. Gross charges for charity care for the years ended June 30, 2010 and 2009, were $226,733 and $154,077, respectively. Reclassifications Certain prior year amounts were reclassified to conform with current year reporting. There was no effect on net assets of the Hospital. 2. Cash and Investments Michigan Compiled Laws Section (Public Act 20 of 1943, as amended) authorizes local governmental units to make deposits and invest in the accounts of federally insured banks, credit unions, and savings and loan associations that have offices in Michigan. The local unit is allowed to invest in bonds, securities, and other direct obligations of the United States or any agency or instrumentality of the United States; repurchase agreements; bankers acceptances of United States banks; commercial paper rated within the two highest classifications, which mature not more than 270 days after the date of purchase; obligations of the state of Michigan or its political subdivisions, which are rated as investment grade; and mutual funds composed of investment vehicles that are legal for direct investment by local units of government in Michigan. The Hospital has designated three banks for the deposit of its funds. The Hospital s deposit policies are in accordance with statutory authority. Due to the volatility of the financial markets, there is a reasonable possibility of changes in fair value and additional investment gains and losses in the near term. The Hospital s cash and investments are subject to several types of risk, which are examined in more detail on the following page

15 Notes to Basic Financial Statements (continued) 2. Cash and Investments (continued) Custodial Credit Risk Custodial credit risk is the risk that in the event of a bank failure, the Hospital s deposits and investments may not be returned to it. The Hospital does not have a deposit policy for custodial credit risk. At June 30, 2010 and 2009, the Hospital has $565,085 and $394,326, respectively, in cash and cash equivalents (certificates of deposit, short-term money market funds, checking accounts, and savings accounts) that are uninsured and uncollateralized. The Hospital believes that due to the dollar amounts of deposits and the limits of FDIC insurance, it is impractical to insure all deposits. As a result, the Hospital evaluates each financial institution with which it deposits funds and assesses the level of risk of each institution; only those institutions with an acceptable estimated risk level are used as depositories. At June 30, 2010 and 2009, there were no investments (classified as internally designated for capital acquisitions) that were uninsured or investments that represent investments in any one issuer exceeding 5% of total investments. Interest Rate Risk Interest rate risk is the risk that the value of investments will decrease as a result of a rise in interest rates. The Hospital s investment policy does not restrict investment maturities, other than commercial paper, which can only be purchased with a 270-day maturity. At June 30, 2010 and 2009, there were no debt investments. 3. Accounts Receivable The Hospital provides healthcare services through inpatient, outpatient, ambulatory care, assisted living, and long-term care facilities and grants credit to patients, substantially all of whom are local residents in the communities served by the Hospital. The Hospital generally does not require collateral or other security in extending credit to patients; however, it routinely obtains assignment of (or is otherwise entitled to receive) patients benefits payable under their health insurance programs, plans, or policies, including, but not limited to, Medicare, Medicaid, health maintenance organizations, and commercial insurance policies

16 Notes to Basic Financial Statements (continued) 3. Accounts Receivable (continued) The allowance for uncollectible accounts is based upon management s assessment of historical and expected net collections considering business and general economic conditions in its service area, trends in healthcare coverage, and other collection indicators. Throughout the year, management assesses the adequacy of the allowance for uncollectible accounts based upon historical write-off experience by payor category and other factors. The results of these reviews are then used to make any modifications to the provision for uncollectible accounts to establish an appropriate allowance for uncollectible accounts. The Hospital follows established guidelines for placing certain past-due patient balances with collection agencies. During 2010, the Hospital began a program of factoring accounts receivable with recourse to a third party. As of June 30, 2010, a total of $352,092 of accounts receivable has been factored and still has recourse potential. The Hospital has an allowance for recourse of $111,800 as of June 30, The details of accounts receivable are set forth below: June Accounts receivable $ 6,705,756 $ 5,128,163 Less: Allowance for uncollectible accounts 695, ,193 Allowance for contractual adjustments 2,046,488 1,623,169 Net accounts receivable 3,963,737 3,055,801 Other 10,893 88,182 Total accounts receivable $ 3,974,630 $ 3,143,

17 Notes to Basic Financial Statements (continued) 3. Accounts Receivable (continued) The Hospital grants credit without collateral to patients, most of whom are local residents and are insured under third-party payor agreements. The composition of receivables from patients and third-party payors was as follows: June Medicare 35% 35% Blue Cross/Blue Shield of Michigan Medicaid Commercial insurance and HMOs Self-pay 4 4 Total 100% 100% 4. Tax Levies The Hospital is operated under the Joint Hospital Authority Act 47 (the Act) of the Michigan Public Acts of Under the Act, by April 1 of each year, the Hospital board is required to prepare a balanced budget for the ensuing year. The budget is to ascertain what amount, if any, is to be raised by taxation from the townships belonging to the Authority to meet their respective shares of the expenses over revenue. Upon certification by the Hospital board, the townships are required to pay their share from the funds they have available or from the proceeds of a tax levy. They are authorized to levy up to.4 mil, but levied.01 mil for both the years ended June 30, 2010 and The required sums are due and payable 120 days after December 1, the date on which local taxes become due and payable in the townships. In addition to the levy described above, the Act allows a levy up to 2 mils for not more than 10 years for capital improvements when approved at a general or special election in the townships belonging to the Authority

18 Notes to Basic Financial Statements (continued) 4. Tax Levies (continued) In May 2007, the electorate approved a 1.6 mil levy for 10 years. The proceeds from the levy are to be used to retire unlimited tax general obligation bonds. The ordinance authorizing the sale of the bonds requires the proceeds of the 1.6 mil tax levy to be deposited in a bond and interest redemption fund. Any amounts in excess of the debt service payments must be deposited in a capital improvement fund and used for capital improvement purposes. Tax levy revenue is composed of the following: Year Ended June Operating tax levy $ 7,204 $ 6,801 Bond retirement 1.6 mil tax levy 1,237,378 1,190,509 Total $ 1,244,582 $ 1,197,

19 Notes to Basic Financial Statements (continued) 5. Capital Assets Costs of capital assets related to depreciable lives for June 30, 2010, are summarized below: 2009 Additions Transfers Retirements 2010 Depreciable Life Years Land improvements $ 574,449 $ 77,590 $ $ (380) $ 651, Building 27,625,987 6,638,765 (2,499) 34,262, Equipment 9,283,302 1,153,921 (1,192,907) 9,244, Construction-in-progress 5,053,419 3,044,171 (7,950,293) 147,297 Total 42,537,157 10,914,447 (7,950,293) (1,195,786) 44,305,525 Less accumulated depreciation: Land improvements 341,733 29,194 (380) 370,547 Building 7,441,868 1,088,285 (2,499) 8,527,654 Equipment 5,658, ,754 (1,192,907) 5,413,151 Total 13,441,905 2,065,233 (1,195,786) 14,311,352 Net carrying amount $ 29,095,252 $ 8,849,214 $ (7,950,293) $ $ 29,994,173 Construction-in-progress at June 30, 2010, consists of costs associated with the renovation of various areas

20 Notes to Basic Financial Statements (continued) 5. Capital Assets (continued) Costs of capital assets related to depreciable lives for June 30, 2009, are summarized below: 2008 Additions Transfers Retirements 2009 Depreciable Life Years Land improvements $ 418,212 $ 156,237 $ $ $ 574, Building 16,358,923 11,267,064 27,625, Equipment 7,081,291 2,442,934 (240,923) 9,283, Construction-in-progress 9,045,154 10,006,863 (13,998,598) 5,053,419 Total 32,903,580 23,873,098 (13,998,598) (240,923) 42,537,157 Less accumulated depreciation: Land improvements 317,669 24, ,733 Building 6,647, ,024 7,441,868 Equipment 5,075, ,776 (240,923) 5,658,304 Total 12,040,964 1,641,864 (240,923) 13,441,905 Net carrying amount $ 20,862,616 $ 22,231,234 $ (13,998,598) $ $ 29,095,252 Construction-in-progress at June 30, 2009, consists mainly of costs associated with the construction of an assisted living facility. Interest expense of $512,845 was capitalized and netted with $130,906 of capitalized interest income during the year

21 Notes to Basic Financial Statements (continued) 6. Long-Term Debt Long-term liability activity for the year ended June 30, 2010, was as follows: June Current Year Additions Current Year Reductions June Amounts Due Within One Year Revenue bonds $ 4,192,672 $ 2,807,328 $ (1,159,525) $ 5,840,475 $ 215,750 Series 2008 bonds 7,185,000 (750,000) 6,435, ,000 Level Acres Mortgage #1 12,874 (12,874) Level Acres Mortgage #2 63,820 (13,503) 50,317 14,783 $ 11,454,366 $ 2,807,328 $ (1,935,902) $ 12,325,792 $ 1,015,533 Long-term liability activity for the year ended June 30, 2009, was as follows: June Current Year Additions Current Year Reductions June Amounts Due Within One Year Revenue bonds $ $ 4,192,672 $ $ 4,192,672 $ 269,000 Series 2008 bonds 7,900,000 (715,000) 7,185, ,000 Level Acres Mortgage #1 25,626 (12,752) 12,874 12,765 Level Acres Mortgage #2 76,413 (12,593) 63,820 13,375 $ 8,002,039 $ 4,192,672 $ (740,345) $ 11,454,366 $ 1,045,140 The Hospital issued general obligation revenue debt in October 2008 not to exceed $7 million. The debt has an annual interest rate of 4.65% and is payable monthly. Principal is payable starting in August The Hospital issued $8.4 million in unlimited tax general obligation bonds in December The bonds have interest rates ranging from 5.125% to 5.375% and are payable annually in amounts ranging from $715,000 to $1,065,000. The proceeds from the 1.6 mil tax levy are being used to retire the unlimited tax general Series 2008 obligation bonds

22 Notes to Basic Financial Statements (continued) 6. Long-Term Debt (continued) Minimum principal payments on long-term debt to maturity as of June 30, 2010, are as follows: 2011 $ 1,015, ,066, ,123, to ,321, to ,719, to ,079,024 Net long-term debt $ 12,325, Retirement Plan The Hospital maintains the Kalkaska Memorial Health Center Retirement Plan, a Section 401(k) plan covering employees having worked more than 1,000 hours per year for two consecutive years. Under the terms of the plan, the Hospital will contribute 1% of employees compensation and will match employee contributions on a sliding scale up to 4% of employee earnings. Total retirement expense was $331,353 and $316,806 for the years ended June 30, 2010 and 2009, respectively. 8. Risk Management The Hospital is exposed to various risks of loss related to property loss, errors and omissions, employee injuries (workers compensation), and professional liability claims, as well as medical benefits provided to employees. The Hospital has purchased commercial insurance for the above claims. Settled claims relating to commercial insurance have not exceeded the amount of insurance in any of the past three years. The Hospital is insured against medical malpractice claims under a claims-based policy, whereby only the claims reported to the insurance carrier during the policy period are covered, regardless of when the incident giving rise to the claim occurred. Under the terms of the policy, the Hospital must pay a deductible toward the costs of litigating or settling any unasserted claims. In addition, the Hospital bears the risk of ultimate costs of any individual claim exceeding the policy limits for claims asserted in the policy year

23 Notes to Basic Financial Statements (continued) 8. Risk Management (continued) Should the claims-made policy not be renewed or replaced with equivalent insurance, claims based on the occurrences during the claims-made term, but reported subsequently, will be uninsured. The Hospital is not aware of any medical malpractice claims, either asserted or unasserted, that would exceed the policy limits. No claims that have exceeded policy coverage limits have been settled during the past three years. The cost of this insurance policy represents the Hospital s cost for such claims for the year, and it has been charged to operations as a current expense. 9. Administrative, Laundry, and Laboratory Service Agreements The Hospital has entered into agreements with Munson Medical Center and Subsidiary and Munson Healthcare and Subsidiaries to receive administrative services, including an administrator, accounting services, physical therapy, certain laboratory tests, and other miscellaneous services. Charges for these services to the Hospital amounted to $2,141,971 and $2,080,300 for the years ended June 30, 2010 and 2009, respectively, of which $185,717 and $154,647, respectively, are included in accounts payable

24 Other Financial Information

25 Details of Combining Statement of Revenues, Expenses, and Changes in Net Assets Year Ended June 30, 2010 Core Services Dialysis Level Acres Combined Operating revenues Net patient service revenue $ 24,302,809 $ 1,013,745 $ $ 25,316,554 Other 768,347 5, , ,141 Total operating revenues 25,071,156 1,019, ,531 26,281,695 Operating expenses Salaries and wages 9,582, ,950 9,885,688 Employee benefits and payroll taxes 3,394, ,794 3,497,207 Medical supplies and drugs 2,618, ,715 7,605 2,936,758 Professional services and consultant fees 793, ,377 Purchased services 3,097, ,034 60,648 3,404,393 Insurance 254,853 20,244 13, ,263 Occupancy 803,174 44,757 45, ,611 Equipment, software, and maintenance 451, , ,283 Depreciation 1,956,271 96,742 12,220 2,065,233 Other 1,166,269 12,158 8,378 1,186,805 Total operating expenses 24,118,996 1,137, ,361 25,409,618 Operating income (loss) 952,160 (118,253) 38, ,077 Nonoperating revenues (expenses) Investment income 6,078 6,078 Interest on debt related to capital assets (611,059) (4,272) (615,331) Tax levy revenue 1,244,582 1,244,582 Total nonoperating revenues, net 639,601 (4,272) 635,329 Increase (decrease) in net assets $ 1,591,761 $ (118,253) $ 33,898 $ 1,507,

26 Ernst & Young LLP Assurance Tax Transactions Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. This Report has been prepared by Ernst & Young LLP, a client serving member firm located in the United States.